Radio

Regulate This! (Ep. 177)

A battle is being waged between the Internet and the State, and this episode of Freakonomics Radio gives you front-row seats. It’s called “Regulate This!” (You can subscribe to the podcast at iTunes, get the RSS feed, or listen via the media player above. You can also read the transcript; it includes credits for the music you’ll hear in the episode.)

At issue is the so-called sharing economy, a range of services that facilitate peer-to-peer transactions through the Internet. Companies like Airbnb, Uber, and Lyft have seen rapid growth and eye-popping valuations, but as they expand around the world, they are increasingly butting heads with government regulators.

BLECHARCZYK: We’re not advocating that there shouldn’t be rules. We’re just saying that things have evolved and it’s worth taking a fresh look from the ground up.

Krueger, meanwhile, argues that current laws aren’t strict enough:

KRUEGER: I want to look at more enforcement, perhaps increase fines, and penalties. I do have a very serious frustration that the kind of law that we really need needs to be federal because the state is superseded by federal law when it comes to regulating online business. Some people seem to think that if you’re a business model that’s on the internet it’s like magic and hocus pocus. It’s just business. And there’s a reason for government to regulate business, whether it has a physical site somewhere or whether it’s in the cloud.

Inspired by Airbnb, the entrepreneur Guy Michlin co-founded EatWith, which enables cooks to convert their homes into restaurants. EatWith has yet to clash with regulators, but he’s bracing for the inevitable:

MICHLIN: I think that sometimes, or actually many times, the regulator is a little bit behind to catch up with technology… And if you think about Airbnb, it’s obvious that this is a phenomenon that’s not going to go away…. Obviously the regulator will need to come in and hopefully in a dialog with all the different constituencies, adapt and create a new regulation that fits the reality.

The ride-sharing company Lyft, meanwhile, has engaged in high-profile showdowns with state regulators around the country. John Zimmer, its co-founder and president, explains:

ZIMMER: They interpret laws one way and are trying to do their job. And we interpret laws another way and are trying to innovate. And those two things are at odds, and the timelines are at odds. And if we took the approach of, “Hey, let’s wait and see what the government does to create a path that is very, very clear … then we wouldn’t be operating anywhere.

Lyft recently got into a head-on collision with New York State regulators, including the office of Attorney General Eric Schneiderman (which has also clashed with Airbnb). Schneiderman’s chief of staff Micah Lashertweeted that Lyft and Zimmer were “not just ‘disruptive’ but also personally dishonest.”

It might be easy to conclude that state regulators are clamping down on these companies in large part to protect the entrenched hotel and taxi industries. Lasher says this isn’t the case, that the A.G.’s office isn’t against innovation or competition, but is instead just looking out for the public:

LASHER: One of the big issues is the question of externalities and external impacts. In other words, if my next-door neighbor is using their apartment as a hotel room, they’re not just running a risk of their apartment getting trashed, they’re having an impact on me. Similarly, in the case of Lyft, if one of those drivers gets into a car accident, doesn’t have appropriate insurance, that can have an impact on a whole bunch of folks who did not sign up for that.

Throughout the episode you’ll hear from award-winning Stanford economist Jonathan Levin, who specializes in Internet marketplaces. Levin tells us a story about a brilliant business idea he had as a kid — and how mobile Internet beat him to the punch.

Amanda Robertson

September 4, 2014 @ 1:27pm

Regarding the tax liabilities owed by the individuals who rent out their homes on a short-term basis through Airbnb: Under Internal Revenue Code section 280A, a person who uses the property as a primary residence, and rents the property for <14 days is not required to pay tax on the rental income. Many of the people who are using Airbnb to rent out a room in their homes are likely NOT evading taxes. Some, to be fair, are likely not paying the proper income tax.

Geekoid

September 4, 2014 @ 2:31pm

You are overlooking state, county and city taxes. Also, people who rent are using it for less then 14 days but people renting may be renting to several people and going over 14 days of rental.

From http://www.law.cornell.edu/uscode/text/26/280A:

(1) In general
For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of—
(A) 14 days, or
(B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.

Eric Goebelbecker

September 4, 2014 @ 2:06pm

Listening to Krueger rack her brains for reasons why EatWith is illegal may have been the most revealing few seconds of "radio" you've had in a long time. A truly penetrating look into how NY legislators think.

Also:

"It might be easy to conclude that state regulators are clamping down on these companies in large part to protect the entrenched hotel and taxi industries. Lasher says this isn’t the case, that the A.G.’s office isn’t against innovation or competition, but is instead just looking out for the public"

Oh. Well that settles it.

Anthony N.

September 4, 2014 @ 5:40pm

I'm a little disappointed we never got an answer from the peer-to-peer startups about the risks of externalized costs. AirBnB makes it pretty clear that as a host on it, you're covered should your tenant damage or mistreat your apartment. What do they do about the externalized cost to your neighbors? Tenants can be loud, damage and stuff can spill out into common areas, and what if in an extreme case, (as every New Yorker fears) a tenant happens to bring bedbugs with him and the infestation affects the entire apartment? The bedbug issue is particularly pernicious, given the lag time between when a tenant may stay and the growth curve of an infestation. How are neighbors protected in this case?

The other thing not mentioned is that from a user perspective, at least when you're dealing with a hotel (and they have bed bugs too) or a real restaurant, you have an identifiable deep-pocketed entity to bring legal action against when things go terribly wrong (food poisoning, illness, etc.). With this individual market, there is no such consumer protection or fallback.

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Hammy

September 4, 2014 @ 6:50pm

Every single day in NYC millions of neighbors live next to millions of neighbors. They find a way to settle disputes for any number of possible unwanted scenarios. Don't you think its kind of lame to want government to come in mediate in this situation? These are not corporations, these are individuals transacting with other individuals. There are already plenty of ways for disputes to be settled.

Al

September 4, 2014 @ 6:39pm

There is no need for the State to minimize risk from our daily lives. When one chooses to stay at a strangers place or eat their food, they consent knowing the risks involved, similar to bungee jumping or skydiving. Let the free market dictate its own rules. These companies represent the best in innovation encouraging positive WIN/WIN interactions. There is no need for a third party to be involved and frankly, it is immoral to initiate force into a voluntary interaction.

NZ

September 5, 2014 @ 7:14pm

You act as if interactions that obediently limit themselves only to consenting parties are common. They are not.

Hammy

September 4, 2014 @ 7:10pm

It's all really a moot point anyway. Competitors (to Uber, AirBnB, Lyft, etc) built on top of the bitcoin blockchain are in the works and there will be nothing gov can do to regulate.

Alex

September 4, 2014 @ 8:45pm

I just have one question. How much hand sanitizer does Liz Krueger go through a year?

Rourke

September 5, 2014 @ 12:43am

I am a huge Freakonomics fan but I think this episode was a little biased. Dubner never distinguishes between Lyft and Airbnb users who are in it for some extra money and do so minimally, and those who have a full scale business operating as a cab driver or faux hotel. There are legitimate reasons these industries are regulated for consumer protection, and if some guy is renting his house out every weekend all year I say that's a business, and should be regulated as such. There should be some kind of minimal use exception to allow for people to make some extra bucks doing this peer to peer stuff, but at a certain point it should be seen as a business and subject to the laws of said business.

holly

September 5, 2014 @ 2:26am

I am an out and proud Air BnB host. We have rented out two bedrooms that were formerly occupied by full time roommates since 2008 to travelers and foreign students here for internships and such. I wanted to comment on the unfortunate fact that hosts generally don't claim their income and therefore pay taxes on it. I felt like the podcast unfairly leads people to believe that Air BnB facilitates people to not claim this income. On the contrary, we receive a 1099 from Air BnB every year, which in turn, I claim and pay every red cent owed on that income. The argument that hosts don't disclose out of fear doesn't hold water because A. the IRS and City/State tax officials have no overlap with either their landlord or the authorities that would "come after them". and B. Just the fact that they are receiving a 1099 means that the IRS has been made aware that they have been paid this money and leaves you vulnerable to audit. So, if anything, Air BnB makes it so that it behooves the hosts to pay at least income tax on their earnings even in cities where we, so far, have not been required to pay sales tax on the earnings any more then were expected to from the income of the full time roommates.

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Avery Szafranski

September 5, 2014 @ 2:46pm

I'd really be interested in hearing you guys expand on your comment about driverless cars. More generally, I'd like to hear your thoughts on the idea of "technology replacing the human mind," and the dangers and opportunities that come with it. Think the issue of automation - and the creative destruction it brings - could fill a full-blown podcast?

AJ Lau

September 5, 2014 @ 3:35pm

Fantastic episode and I do mean the best I've heard from you guys, as of yet!

All of these phony Democrat leaders / fraudsters and their ties with unions and the hotel and cab industries, need to be checked.

Progress, you want progress, start letting the little guy (I don't mean stealing jobs from the current little guys) make money and regulate it fairly.

Funny, I live in Pittsburgh and wasn't a fan of Mayor Ravenstahl (even though I grew up with him in Troy Hill / Deutschtown), but if he was the one that invited Lyft, good for you Luke. I think it must have been Mayor Peduto though...

Pittsburgh Mayor Bill Peduto sent this letter to the Pennsylvania Public Utility Commission regarding its efforts to shut down Lyft and Uber. Pittsburghers who are excited about Uber and Lyft don't understand why the state would fine them collectively more than $200,000. Mayor Peduto wants to know more.

GO BILL! Screw the Commonwealth of PA and the money grubbing "Democrats" that have their hands in the Union Leaders' pockets!

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Bill

September 5, 2014 @ 4:47pm

I felt your story was one sided. You only briefly mentioned the possible effects of neighbors when people rent room or apartment when someone uses Airbnb. The effects on neighbors would be a large issue from establishments that use EatWith. How do the neighbors feel, especially if you lived beneath the servers apartment, to having a crowd in the above apartment many times a week? This isn't an occasional dinner party but a business. If you move in an apartment near a restaurant you would know and expect the price to reflect the effects of being near a business. But with EatWith, a neighbor could suddenly find that the apartment above has a large crowd five nights a week. And what about the landlord that can not rent an apartment because of the noise from the apartment above. These are not issues that should be taken lightly as your story implies or ignores. These are the reasons for regulations. Why didn't your reporters interview more than just the businesses and one government regulator?

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Jamie Tooze

Deanna kile

September 5, 2014 @ 5:34pm

As a landlord of a small 4-plex I put a lot of time, effort and money into the up keep of my property. My building is my retirement. It's upsetting to think of the increase wear and tear that could occur in my apartments due to Air B&B that would eventually impact my pocket book, my retirement. Is it possible to have these rentals occur only when owner approved because in the end it's my liability. Yes, I could request my tenants to pay for any damages but more than likely I'd have to send them to collections or sue which then takes more money out of my pocket. I'm not opposed to the Air B&B but some regulations may be needed if they are not willing to make sure they're participants are obeying the law. I also own my own business apart from rentals and I hate all the unnecessary regulations BUT I can see why they occur because people often need prodding to protect others and not just their bottom line.
P.S. I love your show!

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TheGoodDr

September 5, 2014 @ 7:35pm

These guys are stopping innovation and hindering the economy on your tax dollars.

NZ

September 5, 2014 @ 7:50pm

There's a College Dude way and a Grown Up way of thinking about this.

The College Dude sees a voluntary interaction between two parties and concludes that it's immoral or illogical or disutilitarian for a third party to intervene. End of story. Having some stranger living in your spare bedroom for a couple weeks is no big deal, and besides you get extra money out of the deal, which you can spend on, say, tattoos or energy drinks. There's also something a little dangerous about inviting strangers into your private space, and that makes it coo. If that freaks you out, then you're just a square lame-o who needs to man up and let your younger hipper neighbors (not to mention some younger hipper billionaires on the West Coast) walk all over you.

The Grown Up knows that very few voluntary interactions obediently limit themselves just to the volunteering parties. Spillover is inevitable. Strangers living in your spare bedroom have an incentive to not do anything outrageously illegal, but very little incentive to be good neighbors. If they create an incident or a vermin-attraction, they can just move out and go somewhere else; they don't have to live in the mess they created. This situation makes neighbors uncomfortable. It especially makes uncomfortable people who are prospective buyers in the neighborhood: most people don't want to buy a home in a neighborhood where a lot of strangers come and go.

So, I'm fine with people using Uber or AirB2B or whatever else, as long as it's restricted to housing owned by colleges. And of course also to neighborhoods where the founders of these businesses live.

PS. The Wikipedia page on Brian Chesky, one of the founders of AirBnB, reveals two insights:

1. Chesky does not own a home, because he believes that the best way to improve his business is to use it. "He has spent the last three years sleeping on strangers' couches, in spare rooms and in vacant holiday homes." I don't know for sure, but I'm guessing there isn't a Mrs. Brian Chesky or a Brian Chesky Jr. Chesky is still in College Dude mode.

2. There have been numerous incidents of AirBnB clients' homes being "pillaged" by the people staying in them. That sucks for them, but also imagine being their neighbors. What do they think of the direction their neighborhood is going?

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NZ

September 5, 2014 @ 8:00pm

One more thing about this: A lot of successful social media sites, such as Facebook and AirB2B, are founded by guys from Harvard, based on ideas they came up while living in the dorms at Harvard.

In other words, they're ideas borne out of a world where you rent (not own) a small space in an area with a lot of other people who are very smart, very rational, and not very violent. This is a world where maids and janitors who are mostly invisible to you come and clean up after your messes. And it is a world where you know in a few years you'll be gone, on to even bigger and better things with a Harvard diploma tucked under your arm, and Harvard connections in your proverbial Rolodex.